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In a piece that Barron’s published today, Alexandra Scaggs explains the lush bond and loan package used to finance Blackstone’s mammoth $17 billion LBO of Thomson Reuters, which will be renamed Refinitiv:

Refinitiv’s private-equity buyers say that the leveraged buyout will leave the company with net debt that is 5.2 times the size of its earnings before interest, tax, depreciation and amortization (Ebitda). But investors say that figure is optimistic. They point to a clause buried in a sub-footnote of the offering documents, which explains that the Ebitda figure includes $650 million of cost savings that aren’t expected to be realized until “the end of the third fiscal year” after the deal is completed. Without that $650 million, the leveraged buyout will leave the company with debt 7.2 times its Ebitda for the year ended June 30, and 7.7 times Ebitda for the year ended Dec. 31.

Bond analysts have squawked at the loose covenants:

[T]wo investors said what they viewed as the worst terms in the preliminary debt contracts were left unchanged.

One of these provisions allows Refinitiv’s private-equity owners to pay themselves dividends in scenarios where a normal contract would not allow such a payment, according to Covenant Review analyst Scott Josefson. He estimated that Blackstone and the other sponsors could pay themselves $2 billion in dividends on the day of the deal under the preliminary debt documents. The covenants could also permit the owners to pre-pay unsecured bonds before the secured debt, which would normally come first, he wrote in a note.

But the offering was oversubscribed.



1x-1Carlyle Group’s new co-CEOs Kewsong Lee and Glenn Youngkin discuss how they see the market for private equity investing in this televised interview.

In a cover story this week, BusinessWeek recounts one of the most ill-fated LBOs of the mid-2000s: the $7.5 billion deal for the retailer Toys ‘R’ Us by Bain Capital, KKR and Vornado Realty Trust in 2005. The chain filed bankruptcy earlier this year.

“Bain, KKR, and Vornado, which together collected $470 million in fees and interest payments over the years, will end up losing well over a billion dollars combined,” the story reports.



Big pension funds need to raise their returns. Investing in private equity and hedge funds were two of the most popular means to do this. As hedge funds underperformed the broad markets in recent years, they fell out of favor with pension pools. Private equity firms have retained their appeal, but Calpers said this week it will attempt to make its own direct investments in private companies, bypassing the Blackstones of the world, Chief Executive Officer Marcie Frost said in an interview with Bloomberg this week.

One new strategy will focus on long-term ownership of income-producing companies, not unlike Warren Buffett’s buy-and-hold style. The other will seek out late-stage technology startups, similar to a venture capital fund. Calpers plans to more than double its annual spending on private investments, convinced public markets alone won’t meet its 7 percent return target and established private equity firms can’t fulfill all its needs.

“Putting that kind of money to work to keep our [private equity] allocation at 8 to 10 percent of the portfolio through traditional models is not possible,” … Frost said …. “So we have to look at the way we’re investing in private equity.” …

“We know we will need to build a portfolio of scale — a $40, $50, $60 billion private equity portfolio,” {Chief Investment Officer Ted}Eliopoulos said. “We don’t think we can invest at the scale we need to in the traditional offerings of private equity general partnerships. We need a number of tools in our kit.”

On factor in the proposed change is the fees and that PE firms charge on traditional funds, Frost said.


A long, catty piece in The New York Times this weekend (“Nice City You Got. I’ll Buy It.”) took jabs at Steve Schwarzman for his charitable giving, calling him “a man with more money than respect.”

The story got some basic facts wrong, however:

  1. Schwarzman was not “behind the putsch that drove [his and Pete Peterson’s] enemies from power” at Lehman Brothers in 1984. It was Peterson, an investment banker who had been chairman and co-CEO of Lehman, who was the victim of a putsch the year before, in 1983. The firm’s traders, led by Lou Glucksman, pushed out Peterson – the culmination of years of fighting between Lehman’s bankers and traders. In 1984, under Glucksman, the traders ran up big losses that threatened to sink the firm and cost its partners all their invested capital. Schwarzman played an unauthorized role in soliciting a bid for Lehman that, in effect, bailed out the firm, but there was no putsch in 1984.
    King of Capital recounts the infighting, which ultimately led to Peterson and Schwarzman forming Blackstone in 1985. Ken Auletta’s excellent 1986 book Greed and Glory on Wall Street is devoted entirely to the war within Lehman.
  2. The article states, “Jimmy Lee, a friend of Mr. Schwarzman’s, has joked…” about Schwarzman’s gifts to Catholic charities, suggesting that Lee is still saying these things. Lee died in 2015.
  3. Schwarzman’s tactless comparison in 2010 to a policy dispute to Hitler’s invasion of Poland involved a proposed tax on the profits reaped by private equity and hedge fund managers like himself, not a tax on corporations, as the story said.

Photo from New York Times story:





Jonathan Gray, recently named Blackstone’s president and COO, is now at the head of the line of the next generation of Blackstone management, the likely successor to co-founder and CEO Steve Schwarzman. Though the firm is best known for corporate private equity, Gray rose through the ranks of the real estate group, which has earned remarkable returns for fund investors.  Real estate is now bigger and generates more profit than private equity at Blackstone.

This Bloomberg BusinessWeek story explains why Gray is getting the nod.

King of Capital gives readers the inside story of how Gray beat out Vornado in a hard-fought contest to take over Equity Office Properties in 2007, and how his team sold off many of EOP’s office towers just before the real estate market crashed. EOP turned out to be one of Blackstone’s most profitable investments ever. It and Blackstone’s purchase of the Hilton hotel chain the same year — another Gray deal — earned $20 billion in profits for Blackstone’s funds.



Blackstone announced this week that its GSO unit had raised $7 billion for a so-called “rescue debt” fund that will lend to distressed businesses, and $1.75 billion for an infrastructure secondaries fund that will buy stakes in other infrastructure funds from investor who want to sell out.

That was the good news. But The New York Times reported that Blackstone has missed fundraising deadlines for the $40 billion infrastructure fund it announced last year. Saudi Arabia’s massive Public Investment Fund agreed to match the contributions of other investors dollar-for-dollar up to $20 billion. But so far only two investors, the Pennsylvania Public School Employees’ Retirement System and the Parochial Employees’ Retirement System of Louisiana, have agreed to invest. They have committed $500 million and $75 million, respectively, the Times reported, citing data from Prequin.


Peterson had a remarkably varied career. The son of Greek immigrants who owned an all-night diner in Nebraska, he went on to become an advertising executive at McCann Erickson and then CEO of the Bell and Howell electronics company. He served briefly as Secretary of Commerce under Richard Nixon, then joined Lehman Brothers in 1973. When large trading losses nearly sank the bank, he was elevated to CEO and chairman and was credited with turning the firm around. He was elbowed out as chairman in the 1980s in a turf war with the bank’s traders.

He then teamed up with Steve Schwarzman, also from Lehman, to form Blackstone in 1985.

Although semi-retired when Blackstone went public in 2007, Peterson was still the second largest shareholder after Schwarzman. The IPO allowed Peterson to cash out much of his stake, and he netted $1.9 billion from shares he sold in the offering.

In his later years, he was a crusader on behalf of deficit reduction, and led the Council on Foreign Relations and the Peterson Foundation, which he founded.

King of Capital recounts the ups and downs of Peterson’s decade at Lehman and the contributions he made in Blackstone’s early years. Many years older than Schwarzman, he lent gravitas when Blackstone was a startup, and CEOs trusted him because he had been one at three very different companies. He was also known for his integrity … and for his frequent obliviousness to those around him, whether underlings or conniving rivals. As the book reports, he once was spotted leaving the office with a Post-It note on his hat saying, “Don’t forget your hat, Pete.”



Bloomberg News

Washington Post

New York Times

That’s what The Washington Post dubbed Blackstone’s chairman and CEO. The story says that Schwarzman dined with the President in Palm Beach, Florida, the night after Trump announced trade sanctions targeting China. Schwarzman has attempted to persuade Trump to see the big picture of American-China relations and avoid confrontations with China, the story reports.

The story also reported that China’s sovereign wealth fund has sold off the last of its Blackstone shares. The fund bought an almost-10-percent stake in Blackstone shortly before the company went public in 2007.

17trumpceos2-master768Steve Schwarzman, who chaired President Trump’s Strategic and Policy Forum, formed to advise the White House on on economic issues, watched as the corporate chieftains on the panel bailed out this week over the President’s comments on the violence at a white-supremacist rally in Charlottesville, Virginia. One by one other CEOs were resigning. The New York Times reported:

As the group disintegrated, Stephen A. Schwarzman, the chief executive of the Blackstone Group, was kept in the loop. Mr. Schwarzman was one of Mr. Trump’s closest business confidants and the chairman of the policy forum, but he was also outraged by the president’s remarks.

On Tuesday evening, he called Jared Kushner, the president’s son-in-law and a White House adviser, to inform him that the policy forum was falling apart. At the same time, Mr. Schwarzman began drafting a statement about disbanding the group. 

That was preempted when the White House announced the end of the forum.

Another crucial player in the splintering of the panel, according to The Times, was ex-Blackstone partner Larry Fink, CEO of BlackRock:

On Wednesday morning, Laurence D. Fink, chief executive of BlackRock, the world’s largest asset manager, called Ms. Nooyi, Ms. Rometty, Ms. Barra and Douglas McMillon, the chief executive of Walmart.

Mr. Fink decided to step down after seeing the president’s remarks on Tuesday, and now encouraged other executives to join him.

Fink left Blackstone to form Blackrock in 1994 after a dispute over ownership and profits, as chronicled in chapter 10 of King of Capital.